The S&P 500 gained 0.9% on Wednesday, moving closer to its all-time highs, while the Nasdaq 100 surged 1.7%, reaching a new record.
This rally followed November's inflation report, which aligned with economists' expectations and bolstered hopes for a likely Federal Reserve rate cut at its upcoming meeting.
Tech stocks spearheaded the rally, pushing the sector’s year-to-date gains beyond 24%, with significant contributions from communication services and consumer discretionary stocks.
The "Magnificent Seven" mega-cap stocks all advanced, led by Alphabet’s 5.5% surge following a quantum computing breakthrough, Tesla’s 5.9% jump, and Nvidia’s 3.1% rise.
Meta (+2.1%), Amazon (+2.3%), and Microsoft (+1.3%) were also among the top gainers.
We had no surprises from the inflation data.
With that, as we discussed on Monday, the Fed should do nothing to disrupt market expectations for a quarter point rate cut next week. But they will almost certainly make significant adjustments in their Summary of Economic Projections (SEP) — reducing expectations on the number of cuts for next year.
Even though the U.S. rate outlook is less "easy" than it was three months ago (following the Fed's 50 bps cut), it's important to remember that this easing cycle (as was the tightening cycle) is synchronised with other major global central banks.
The Bank of Canada cut rates yesterday. The Swiss National Bank will be cutting today, and so will the European Central Bank. It's a global easing cycle.
Add to this, now China is looking to stimulate aggressively next year. Additionally we should expect China to counter Trump's tariffs with their favourite tool: a weak yuan (their tool for manipulating economic advantage).
In the seven weeks surrounding the 2016 election (early October through late November), the Chinese central bank made the largest seven week devaluation of the yuan since adopting the managed float exchange rate regime back in 2005.
This time they will head into Trump 2.0 with the yuan already set at the weakest levels since 2007.
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